Where to Next for Retail?

The national retail segment recorded negative absorption of 2.1 million square feet in the beginning of Q2 2025, which has not happened since 2020. This occurred as a result of retailers recording bankruptcies and closures at the start of 2025. In the first quarter, over 108 million square feet was added back because of shutdowns. 

Now, the retail segment is finding new ways to adjust to this environment. This includes backfilling spaces that were closed and prioritizing consumers’ needs to maintain stable performance metrics.

Backfilling Spaces

Moveouts have benefited retailers as backfilling leftover spaces rose to the fastest pace in almost 15 years. The most notable moveouts so far this year have been for Forever 21 and Party City, which quickly noted competition from other tenants to take advantage of the leftover space. Party City closures stood out to discount tenants as its leftover spaces were leased by Five Below and Dollar Tree. Five Below moved fast to backfill these locations as it leased 44 stores located on the West Coast. 

Now, the latest bankruptcy news from Rite Aid will provide spaces to be backfilled. While the retailer has not stated how many stores will be shut down, it is in the process of selling its properties. Rite Aid added that stores that aren’t sold will be divested or monetized, but the closures are important to note as they can provide backfilling opportunities for tenants.  

Suburb Movement

Retailers are recognizing that consumers are spending more time and money in suburbs, making these locations desirable for expansions. Movement to suburban areas comes as residents relocated here from urban locations during the pandemic, seeking more space, affordability, and a better quality of life. The migration has increased suburban population levels, as well as rent growth. One example is New York, which recorded rent growth at 2.1% in its suburbs compared to 0.7% in its downtown. 

Retailers like Ulta and Five Below have already begun expansions in suburban locations. Five Below announced it will open 150 new stores through February 2026, targeting high-performing suburbs as about 87% of its locations are already in these areas. 

Ulta plans to open around 200 stores over the next three years, which could bring its store count to over 1,800 locations, with a focus on suburban locations. The newest suburban stores are expected to be added in Rochester, New York, Hendersonville, North Carolina, and Alexandria, Virginia.

Smaller-Store Format Uptick

Small-store formats range between 2,000 and 3,000 square feet, and offer consumers an enhanced experience where they can form a stronger connection with the brand. The increase in small-store formats is driven by shifting consumer preferences, the rise of omnichannel retail, and the strategic repositioning of large retailers. This movement solidifies that major chains are adopting a more agile and localized approach to meet consumer demand. 

These smaller locations have proved their popularity as over two-thirds of leases in Q1 2025 were for spaces 2,500 square feet or under. One standout retailer that is leading the pack for small-store formats is IKEA. The furniture store is strategically opening smaller stores that allow customers to order products and see a curated selection of goods without having to go to the full-size store. IKEA has plans for eight small-format stores this year, featuring openings in the Dallas-Fort Worth and Phoenix metros.